Silver Market Grows Cautious

Silver Market Grows Cautious

It has been another range-bound week for silver. On Monday, the metal lost $0.53 for a final New York spot price of $33.98. The metal closed $0.08 lower on Tuesday only to turn around and gain back the same eight cents for the close on Wednesday. Silver continues to travel intraday, but still cannot move higher. And while its price action this week may not have been notable, the number of warnings issued about what could lie in store for the metal are significant. 

Silver appears to need fundamental news to move higher, but has failed to find it. In its absence, the metal has turned to tracking other crowds; this week, silver took direction from gold, platinum and copper, which also came under pressure. The white metal then turned to US equities, which didn't work out well given the downside reversal on Tuesday.

Instead of struggling to breach $35, this week silver spent much of its time below $34 with market participants insisting that the bulls had best gather some force soon.

“We are watching support at $33.37, the low from September 26th, as a breach through there on a closing basis could indicate a double-top in silver, which would target the low $31.00 level,” states a Scotiabank market note.

Double top is a technical term that refers to price action that forms an “M” pattern on a chart due to a price rise, decline, second rise and second decline.

Others are citing concerns about the futures market.

Net speculative length for COMEX silver continues to rise. Commodity Futures Trading Commission data shows that during the week ended October 2, 763.2 metric tons were added while 439.2 MT were stacked on the long side and 324 tons were unwound from the short side.

However, commercial banks are also aboard this ship and are continuing to place their weight on the opposite side. The October Bank Participation Report shows that these firms hold 67,002 short contracts compared to roughly 12,106 long contracts.

More than one market participant this week has commented on how extremely dangerous this situation appears.

“This massive towering Commercial short position portends an imminent plunge in the silver price,” said Clive Maund in a market update for Kitco. “A bloodbath is believed to be imminent in the silver market now that its cheerleaders have herded their flocks into the corral, ready to be fleeced again."

Standard Bank pointed to the danger of rising speculative length for commodities when there is a lack of price momentum.

“Speculative length is still being added, but prices are not rising; this is worrying because it implies that a price rally could be sustained only if real demand follows,” the bank said.

If demand has finally become the issue, perhaps the silver market was correct in its decision to disregard news of the People's Bank of China's liquidity injection into the banking system. The net injection for the week was RMB 164 billion, according to Reuters. But the silver market did not respond positively. Economic data out of this key silver market continues to look gloomier. While the debate about whether China will have a hard or soft landing rages, a number of metrics associated with industrial production suggest that either outcome will not be positive for commodities like silver. Weak PMI and weak freight data are two examples.

A shift toward real demand for the metal could also explain why silver came under pressure from lowered growth expectations from the International Monetary Fund (IMF), which this week slashed its global growth estimate for 2012 from 3.5 percent to 3.3 percent. For 2013, the IMF cut global growth expectations from 3.9 percent to 3.6 percent. It also warned that conditions could worsen if the US does not address its budget crisis with greater urgency.

The close

On Thursday, COMEX December silver ended the floor session near mid-range, down $0.03 at $34.07. The New York spot market closed with silver up $0.02, which meant it was able to post a $34 close.

Also expressing caution, CME Group said that residually high open interest in silver continues to favor the bull camp, but a continued rise in open interest on a sharp slide in silver prices could shift that indicator squarely into the bear camp.

Company news

Endeavour Silver (NYSE:EXK,TSX:EDR) announced that the illegal work stoppage near the El Cubo mine in Guanajuato, Mexico, which involved workers blocking access to some sites, has now been resolved.

Most of the issues were related to the workers' former employer, an outsourcing company used by AuRico Gold (TSX:AUQ), the previous owner of El Cubo. The outsourcing company's actions put the workers' jobs and accrued benefits at risk.

Silver Bull Resources (TSX:SVB,AMEX:SVBL) announced intersecting high grades of silver at its Sierra Mojada project in Coahuila, Mexico, specifically at the eastern end of the Shallow Silver Zone.

Highlights include 158.98 grams per metric ton silver over 30.75 meters, including 2,250 g/t silver over 1 meter, 703.5 g/t silver over 1.2 meters and 177.6 g/t silver over 5.35 meters.

These results are from the sixth batch of drill holes from the underground drill program.

Tim Barry, president, CEO and director of Silver Bull, explained, "[t]he purpose of the twinning program is to raise confidence in the complete long hole data set comprised of over 2,700 holes. This current batch is mostly targeting holes that are situated within the lower grade halo in between the high grade structures which typically average intercepts greater than of 120g/t silver.”


Securities Disclosure: I, Michelle Smith, do not hold equity interests in any companies mentioned in this article.

Silver Market Grows Cautious from Silver Investing News